IFRS, a new phase in financial reporting
Sunil KARUNANAYAKE
The stock market crash and the ensuing great depression in the early
part of the 20th century is perhaps just a dream to the present
generation.
The world best seller "Gone with the Wind" by celebrated author
Margaret Mitchell that also became a celluloid epic gives a vivid
illustration how the families went bankrupt as during this era most
people were heavily dependent in the stock market.
Such was the impact of the 1929 crash. In the 1997 East Asian crisis
created a major debacle that heavily affected the strong economy of the
South Asian tigers who built strong economies within a wave of new
industrialization. The South Asian crisis was followed by the Russian
Ruble crisis that did affect Sri Lankan tea trade. In the new millennium
a different crisis hit global business with the Enron and Worldcom
accounting frauds exposed unbelievable corporate crimes thus exposing
fraudulent activities of the company CEO's and CFO's resulting in these
high officers being sentenced to imprisonment.
Another casualty was the auditors Arthur Anderson. These events
certainly did cause some stress among the global accounting community
and some remedial measures were considered necessary to restore
confidence among the public. As a consequence United States a country
that was affected enacted the "Sarbanes Oxley" Act (Sarbox) to
strengthen controls to instill some degree of faith in the business and
investor community.
Within a decade of this happening, the global financial crisis
originating from the collapse of the Lehman brothers to giant Bank of
Scotland left a wave of destruction or a financial tsunami right across
the highly inter connected world plunging the economies into absolute
turmoil causing the great depression II.
One of the main accusations for this catastrophe was the allegation
that the financial sector was not adequately regulated while another
issue was the extraordinary compensation of high officers. Economies in
the US and Europe have yet failed to recover thus causing a plethora of
problems such as unemployment mounting.
US authorities reacted promptly and the result was the Dodd-Frank
Wall Street reform and consumer protection act that proposed a series of
far reaching reforms such as eliminating bail outs at taxpayers'
expense, transparency in governance, strengthening audit and
compensation committees, setting up of financial stability oversight
council and even funeral plans (rapid and orderly shut down for large
financial institutions in the event of a failure).
"While the sort of heedless risk-taking has led to lucrative returns
for many financiers in recent decades, the vulnerabilities in the
financial system that have been exposed by the crisis must at some point
lead to an accounting-not only of the practices that have become common
on Wall Street but of the principles that underline them.
When the history of the great recession is written, they can be
singled out as the bonus babies who were short-sighted that they put the
economy at a risk and contributed to the destruction of their own
companies - (Too big to fall-Andrew Ross Sorkin)"
Frequency of these catastrophes no doubt posed a heavy challenge to
standard setters of accounting and auditing profession to reexamine the
existing standards in a bid to enhance uniformity of measurement and
accurate reporting. Financial reporting a key instrument in public
accountability plays a significant role in attracting the investor
community.
Today Sri Lanka is pursuing a major drive to increase the foreign
direct investments to strengthen external finances. Adherences to
established standards give a sort of confidence potential to the
investing community. The responsibility of formulating the accounting
standards in Sri Lanka rests with the Institute of Chartered Accountants
in Sri Lanka.
"In the wake of the unprecedented number of corporate failures that
have taken place in different parts of the world, the regulators have
become more stringent. Standards setters such as IASB, FASB, FRC, PCOAB
have started revising technical standards. In this backdrop the role of
the auditor has come to the spotlight and is under scrutiny than ever
before. The public and regulators in particular demand a higher standard
of quality from auditors. (Suranga Indunil - The Chartered Accountant)"
The enforcement of International Finance Reporting Standards (IFRS)
that becomes mandatory from January 2012 poses many challenges to the
global accountancy profession.
IFRS are the accounting and disclosure rules for corporate financial
reporting, as established by the International Accounting Standards
Board (IASB) based in London whose purpose is to develop clear, globally
applicable rules for reporting financial status to investors and
stakeholders.
IFRS has broad global coverage and it is said that more than 110
countries currently require or allow reporting using IFRS's.
Rules created by the IASB are applied automatically at a number of
stock exchanges including Australia and European exchanges. China are
said to be 'substantially converged' in addition to US, Brazil, Canada,
India, South Korea, Mexico, Argentina, Japan, Indonesia and Russia.
Convergence to IFRS though not very complex is a huge challenge even
in Sri Lanka for listed companies and even the auditors.
The Institute of Chartered Accountants of Sri Lanka however has taken
early steps to converge Sri Lanka Accounting Standards (SLAS) with IFRS
in 2012 by issuing SLFRS in 2012 by issuing SLFRS and LKAS to cover the
accounting period commencing from 2012. This must be preceded by
comparatives for 2011.
IFRS embraces a variety of issues outside pure accounting such as
business, taxation and regulatory and modifications to the ERP systems.
All these require appropriately competent personnel along with close
supervision.
IFRS also brings in a new classification basis for financial
instruments and the requirement to use the skills and knowledge of
valuers and actuarists.
The audit committees too will be burdened with responsibilities for
ensuring the total involvement of the auditors in the conversion process
and ensuring that the management is adopting the right policies. Since
much is expected from auditors it is of paramount importance that
auditors are well equipped.
It is a consolation that application of IFRS for SME's a key player
in the country's business sector will be minimal with the availability
of a separate standard. "A key governance challenge facing most of the
listed companies in Sri Lanka this year is the conversion to the new
accounting standards issued by the Institute of Chartered Accountants of
Sri Lanka comprising SLFRS and LKAS.
Most companies are still living under the illusion that SLFRS is not
much different from current accounting, and it can be considered when
preparing financial statements at the end of the financial year.
In the backdrop of these far reaching changes boards and audit
committees should consider how to monitor the quality and integrity of
company's internal conversion process, and how to ensure that the
communication to investors of the impact of SLFRS on reported results
does not have an adverse share price impact that is not justified by the
underlying facts - (Ernst & Young)"
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